Beyond the Boom: Can New Zealand’s Economy Recover Without Rising House Prices?

For decades, New Zealand’s economic fortunes have been inextricably linked to its housing market. But a subtle shift is underway. While a full-blown housing boom isn’t anticipated this year – forecasts suggest a modest rise of under 5%, with some predicting even less – the economy is showing surprising resilience. Retail spending has defied expectations, rising consistently even as house prices plateaued. This begs the question: can New Zealand achieve a sustained economic recovery without the traditional lift from escalating property values?

The Income Expectation Effect: A Paradigm Shift

The conventional wisdom has always been the “housing wealth effect” – rising house prices make homeowners feel wealthier, leading to increased spending. However, emerging economic literature, as highlighted by Westpac’s senior economist Michael Gordon, suggests a more nuanced dynamic. The current evidence points towards an “income expectations effect” – people spend more when they anticipate their incomes will rise, and this expectation, in turn, influences house prices. This is a critical distinction, as it suggests the relationship isn’t solely driven by existing wealth, but by future prospects.

Historically, New Zealand’s housing wealth and household spending have been strongly correlated, arguably more so than in other developed economies. But the volatility of recent years, spurred by Covid-19 and subsequent policy responses, has disrupted this pattern. Lower interest rates are already providing a boost, with retail sales volumes rising 0.9% in December – a figure exceeding expectations.

Beyond Auckland: Regional Resilience and the Primary Sector

The narrative isn’t uniform across the country. Simplicity chief economist Shamubeel Eaqub points out that regions have already demonstrated economic growth independent of house price surges. While the residential property market remains a significant source of capital, particularly for small businesses relying on mortgage-backed loans, growth isn’t impossible without it. It may simply be slower and less dramatic.

Indeed, a look beyond the major urban centers reveals encouraging signs. The downturn has been largely driven by the squeeze on household disposable income due to rising essential costs. However, a significant amount of pent-up demand exists – for home renovations, vehicle replacements, business investments, and more. Crucially, growth is emerging in the provinces, fueled by a surprisingly strong performance in the primary sector. Wool and dairy prices are favorable, and the sale of brand businesses is injecting capital into the economy. When was the last time sheep and beef farmers were experiencing such positive conditions?

The Credit Crunch: The Biggest Unknown

While positive indicators are emerging, a key constraint remains: access to credit. Eaqub emphasizes that the willingness of banks to lend – both in terms of price and quantity – is the biggest unknown factor. Debt remains essential for “supercharging” the economic cycle, and a cautious lending environment could stifle growth. The availability of credit will dictate not only house prices but also the overall pace of recovery.

Uneven Recovery and the Opportunity for Investment

It’s important to acknowledge that the recovery won’t be felt equally across the population. Some individuals and businesses are already well-positioned to capitalize on the changing landscape, possessing the resources and plans to invest. This presents a unique opportunity for those with capital to deploy it strategically.

The Role of Housing Supply

Historically, New Zealand’s housing supply has been notoriously unresponsive to demand. However, there are emerging signs that this is changing. An increase in housing supply, even a modest one, could moderate price increases and contribute to a more sustainable economic recovery. The magnitude of this effect will depend on the responsiveness of the supply side, a factor closely watched by economists.

Looking Ahead: A More Sustainable Growth Model?

The current economic climate presents a potential turning point for New Zealand. The decoupling of economic growth from house price inflation, while not without its challenges, could pave the way for a more sustainable and diversified economy. The focus is shifting towards income expectations, regional development, and the strength of the primary sector. This isn’t to say that housing wealth effects are irrelevant – they likely amplify the economic cycle – but they are no longer the sole engine of growth.

What are your predictions for New Zealand’s economic future? Share your insights in the comments below!